Newsroom

UK: Boosting growth and tackling inequality are key to recovery

6/02/2012 - Britain must continue to pursue pro-growth, as well as inequality reducing structural reforms in order to recover from the nation's deepest recession in nearly a century, according to the OECD's latest Economic Survey of the UK

The effects of the global financial crisis, turbulence from the euro area, and weak domestic demand risk prolonging the downturn. This could reduce the country’s long-term growth potential and add to social pressures.

Presenting the Survey in London, OECD Secretary-General Angel Gurría said, however, that he is confident the UK economy has the capacity to recover over time, providing the right growth- enhancing policies are pursued.

The report argues that monetary policy is a key tool to stimulate the economy in the short term, while the government’s fiscal plan, hard won credibility on the financial markets, and strong institutions allow it the flexibility to adapt to weaker than expected growth. It is appropriate to allow the deficit to shrink more slowly than initially planned to cushion the shock and help households through any downturn. Additional tax increases or spending cuts - beyond those already planned - should not be imposed to compensate for a temporary slowdown, the Survey says.

But medium-term fiscal consolidation continues to be essential, it adds. The government’s plan has achieved a significant reduction of the public deficit, despite difficult economic conditions, but it is still over 8% of GDP (excluding one-offs), while the government debt–to-GDP ratio is above 80%.

The Survey emphasises the importance of implementing the right package of structural reforms to ensure a sustained recovery. “Fiscal consolidation needs to be embedded in a comprehensive package that also promotes growth. Further structural reforms are key to a stronger, more inclusive and prosperous Britain”, said Mr Gurria.

The Survey outlines what needs to be done to combat inequality by raising the number and quality of jobs, investing in people’s skills and strengthening the welfare system. Among the recommendations are measures to tackle skill shortages, ease the transition from education to the job market and increase incentives to move off benefits and into work.

On youth training and apprenticeship programmes, better cooperation is needed between government agencies and employers, particularly small businesses. Improved cooperation is also required between businesses, colleges and local authorities to integrate graduates more effectively into the labour market.

Work incentives for single parents and potential second earners in families should be improved within the Universal Credit welfare reform, such as by increasing the refund rate for childcare.

Active labour market policies need to work hand-in-hand with growth-enhancing structural reforms. The UK’s falling productivity must be raised. Excessively restrictive land-use planning regulations and insufficient investment in R&D and in productive infrastructure, such as transport and energy, are creating obstacles to growth.

The Survey says careful loosening of planning restrictions can boost construction, create jobs, make housing more affordable and encourage investment. Other recommendations include:

Review certain tax rules that may be hampering business growth, such as preferential treatment for small firms which could act as a disincentive for highly productive firms to expand.

Continue to improve the business environment and provide government support to boost exports.

Support higher education as an export and avoid excessive restrictions on student visas.

Promote green growth. Road pricing should be introduced on the most congested motorways and then gradually extended to other roads with high traffic density. Move towards a uniform price for carbon across sectors and fuels.

Mr Gurría also welcomed the UK’s commitment to working with the OECD to avoid tax base erosion and profit shifting. The work involves reviewing and upgrading the rules and standards of international taxation. An OECD report will be presented to the G20 next week.